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Analysts attributed the rally in banking stocks to the underperformance in the sector compared to the benchmark and strong foreign inflows. Bank stocks have the highest weight on the Sensex and Nifty and a pick-up in overseas investor purchases of Indian equities benefit this sector the most.
Investors also hope the RBI to cut interest rates when the Fed eases monetary policy. “The dot plot that the market looks forward to during the Fed commentary indicates a 75-bps rate cut in 2024 which is a green signal to easing of interest rates in India as well,” said Lakshmi Iyer, CEO-investment and strategy at Kotak Alternate Asset Managers.
Many banking stocks gained between 1% and 3%; IndusInd Bank gained 3.05%, Bajaj Finance rose 2.8%, Bajaj Finserv and ICICI Bank advanced 2.79% and 1.99%, respectively.
Fund managers said the banking sector has underperformed in the last 12 months due to the tightening of the interest rate cycle, which has changed now. So far in 2023, the Bankex has gained 9.73% as against the 15.28 % advance in the Sensex.
“The likelihood of rate cuts by the end of 2024 is higher which would make the base rate between 3.50% to 3.75%,” said Jayesh Bhanushali, lead-research at IIFL Securities. “This means foreign money is likely to enter the markets in a huge way.”
Money managers said that since the banking sector is a beneficiary of rate cuts, the market is discounting it ahead of the actual rate cut as is the norm. “NBFCs are likely to benefit the most since they have a fixed rate book and there is scope of net interest margin (NIM) expansion,” said Christy Mathai, fund manager at Quantum MF. “Banks with fixed rate portfolios have also done well and are likely to benefit further.”Bhanushali said that IndusInd Bank, Axis Bank, and HDFC Bank are the top stock picks in the banking space while Bajaj Finance and Cholamandalam Investment are attractive in the NBFC segment.
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